IRS Rules for Fair Market Value of Stolen Property

The Internal Revenue Service (IRS) has rules for the tax treatment of stolen property that apply to both the thief and the victim. The value of the property is a central element in these situations, creating tax consequences that can include recognizing unexpected income or claiming a limited deduction for the loss. Understanding these tax implications is important for navigating the financial aftermath of a theft.

Taxable Income from Stolen Property

The U.S. tax code operates on the principle that all income is taxable, regardless of its source, which includes illegally obtained assets. A person who steals property must report its fair market value as income in the year the theft occurs. This income is generally reported on Form 1040, under the “Other Income” line.

This requirement places the individual in the position of having to declare their illicit gains. The amount to be reported is the fair market value at the time the item was stolen, not its potential sale price. This rule ensures that all economic gains are subject to taxation, a principle used to prosecute gangster Al Capone for tax evasion.

A provision exists for situations where the thief returns the stolen property. If the property is returned to its rightful owner in the same year it was taken, the thief does not have to report its value as income. If returned in a subsequent year, the individual can take a deduction for the amount they previously reported as income.

The deductible amount is the lesser of the property’s adjusted basis or its fair market value at the time of its return. This deduction is claimed in the year the property is returned. The burden of proof for both the initial value and the value upon return rests with the individual.

Determining Fair Market Value

The concept of fair market value (FMV) is central to how the IRS handles stolen property. The IRS defines FMV as the price at which property would change hands between a willing buyer and a seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. This requires an objective assessment of the property’s worth at the moment of the theft.

For commonly stolen items, establishing FMV involves practical, evidence-based methods. For a vehicle, one would consult a recognized used car guide, such as the Kelley Blue Book, for a model of the same make, year, and condition. For electronics or appliances, the replacement cost for a similar new or used item can serve as a strong indicator of value.

When dealing with unique assets like jewelry, art, or collectibles, the process can be more complex. An appraisal from a qualified professional is often the most reliable method for determining the value. For less valuable collectibles, records of recent sales of similar items at auction or through specialized dealers can provide a defensible FMV. It is important to gather and maintain objective documentation, such as receipts and photographs, to support the valuation.

Theft Loss Deductions for Victims

For victims of theft, the ability to deduct the financial loss on their federal tax return has become restricted. The Tax Cuts and Jobs Act of 2017 (TCJA) suspended the deduction for personal casualty and theft losses for tax years 2018 through 2025. A deduction for a personal theft loss is only permitted if the loss occurred as a direct result of a federally declared disaster.

If a theft loss qualifies under these disaster-related rules, the victim must use Form 4684, “Casualties and Thefts,” to calculate and report it. The deductible amount is the lesser of the property’s adjusted basis or the decrease in its FMV caused by the theft. Adjusted basis is the original cost of the property, plus any improvements, minus any depreciation. For stolen property, the decrease in FMV is its value just before it was stolen.

The calculated loss must first be reduced by any insurance payments or other reimbursements received. After accounting for reimbursements, two additional limitations apply. Each separate theft event is subject to a $100 reduction, and the total of all casualty and theft losses for the year is only deductible to the extent it exceeds 10% of the taxpayer’s adjusted gross income (AGI).